U.S. entrepreneurs might associate microfinance with developing economies, given that the Obama administration launched an initiative to provide $100 million in small loans to start-up enterprises in these nations. However, microloans are also an increasingly critical source of funding for domestic small businesses, and the potential loan amounts are not exactly micro. The U.S. Small Business Administration offers microloans of up to $50,000.
The SBA microloan program is the only government funded program and may be the easiest for entrepreneurs to tackle, but other options include “nontraditional” resources like Accion USA, a microfinance community organization that offers small business loans up to $50,000 as well as business consulting to small business owners who are unable to secure traditional financing.
Above and beyond these sources, there may be local peer-to-peer microloans available for entrepreneurs with good credit from sources like Lending Club. Lending Club provides loans with individual investors pledging a small amount ($25) until the full amount is reached. Rates for Lending Club may be better than those charges by traditional lenders.
How do I apply for an SBA microloan?
Applying for an SBA microloan is fairly simple, and involves working through a local lender.
- Contact your local economic development office and speak to the person in charge of microloans. The SBA disburses microloan funds through local, non-profit community organizations that assist borrowers in managing the loan. A complete list of local lenders is available on the SBA website.
- Provide your potential lender with the necessary information about your business to determine eligibility. One of the advantages of microloans is that they are often available for smaller enterprises that may not have a solid credit history or substantial collateral. Generally, local businesses with relatively modest financial needs are good candidates. Although $50,000 is the maximum loan amount, the average SBA microloan is around $13,000. A borrower may also have to attend a training session related to microlending, or to other aspects of running a small business.
What are the terms and interest rates attached to the loan?
Microloan interest rates vary depending on the amount of the loan, but normally fall between 8 and 13 percent. All microloans must be paid back within six years, but the payback period also varies depending on the size and terms agreed upon for the loan. The terms of the loan will often be contingent on how the borrower plans to use the funds.
How can I spend my microloan?
Many lenders will be specific about the intended use of the loan, limiting borrowers to only a handful of potential uses. SBA microloans may not be used to purchase land or property, or to pay employee salaries and bonuses. Microloan recipients also may not pay off other loans with their microloan.
However, microloans can be used for a variety of purposes that are crucial to businesses, including:
- Working capital
- Inventory of supplies
- Furniture or fixtures
- Machinery or equipment
Small business owners who are interested in obtaining an SBA microloan or would like more information can refer to the SBA's website, which provides an overview of the program.